Macy’s (NYSE:M) stock has been under tremendous pressure in 2020, mostly because the novel coronavirus pandemic has entirely killed consumer discretionary spending and forced Macy’s to close many of its stores for several months, but also because there are fears out there Macy’s will become irrelevant in a post-Covid world where malls are antiquated and the physical retail sales pie in much smaller.
Such fears are overstated.
Malls aren’t dying. Physical shopping will forever be a thing. And Macy’s projects to be one of the “last men standing” in the mall, giving the company a compelling opportunity to grow market share in a still vibrant category over the next few years.
To that end, I think it’s smart to buy the dip in M stock today, and weather near-term turbulence. Over the next 12 to 24 months, this stock could explode higher as prevailing survival fears ease.
The Macy’s Bear Thesis
I completely and fully understand the bear thesis on M stock. Indeed, that bear thesis actually makes a lot of sense.
Consumers are migrating online. The physical shopping channel is shrinking. Malls are having to downsize as a result. Amid this shrinking of the physical retail channel, only the best of the best retailers are surviving. Everyone else is going under.
See JC Penney. Or Sears. Or any of the other 24 retailers that have declared bankruptcy in 2020.
Covid-19 only accelerated this downsizing trend. So, whereas many retailers may have had a few years left to keep the doors open pre-Covid, they now have just a few months.
Bears believe Macy’s isn’t differentiated enough in terms of real estate, product selection or value prop to survive this downsizing. So, the company will inevitably fold up shop, and go under.
This bear thesis won over the minds of investors in 2020, and is a large reasons why M stock is down 60% year-to-date.
Fears Are Overstated
While I believe the fears surrounding Macy’s long-term growth prospects are correct, I also believe they are overstated.
Mall aren’t dying. They are reinventing themselves as multi-purpose entertainment destinations, with retail shops, cafes, restaurants, gyms, theaters and arcades. Driven by a seemingly endless consumer thirst for experiences, these new, multi-purpose entertainment malls were thriving before Covid-19 and will continue to long after the pandemic passes.
In those still vibrant malls, retail shops will be much less prominent. Physical retail downsizing will transpire. But there will still be retail stores, including stalwart department stores. Many of those stalwarts have already gone under.
Who is left?
Macy’s and Nordstrom (NYSE:JWN). Do you really think that, at the end of the day, we will only have one chain of mall retail stores? Unlikely. I see both Macy’s and Nordstrom as surviving this downsizing. Nordstrom because of its premium product value prop. Macy’s because of its all-in-one, affordable prices value prop.
Thus, over the next few years, I see both Macy’s and Nordstrom gaining market share in a shrinking mall retail pie. Those two dynamics will largely offset one another and revenues for both retailers will remain steady over the next five-plus years. Margins and profits will remain steady, too.
M stock currently isn’t priced for this reality.
Discounted Valuation for Macy’s Stock
Because of prevailing fears that Macy’s fill follow in JC Penney’s footsteps, M stock is currently priced for bankruptcy.
Macy’s current market cap is equal to 10% of its trailing sales base. M stock also trades at 1.5-times cash flow, and 0.8-times book value.
Those are dirt cheap multiples that make sense if and only if Macy’s is going to declare bankruptcy at some point in the near future. While that is entirely possible, it’s unlikely, and instead, the more likely path forward here is for Macy’s sales and profit trends to recover in 2021 and stabilize thereafter.
M stock is so cheap that if Macy’s just stabilize sales, the stock will soar.
The trailing five-year-average sales multiple is 0.3. It’s currently at 0.1. So even if sales don’t budge and investor sentiment just improves to a point where bankruptcy is not the base case, M stock could triple.
Bottom Line on M Stock
Most investors don’t want to touch M stock with a nine foot pole.
I understand why.
But I think dip buyers brave enough to play the contrarian here will be rewarded with big profits over the next 12 to 24 months, as prevailing bankruptcy fears ease and investor sentiment dramatically improves.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.